Supermerger sparks concern

“Fear of Amazon” may not yet be a phrase in the dictionary, but it is the sentiment that underlies the merger between Random House and Penguin to create a super-publisher with worldwide revenues of £2.6-billion.

Yet the curiosity is that, for all the underlying worry, the book industry remains far healthier than other media segments battered by the digital revolution.

E-book sales are lifting off — helped not least by discreet readers of Random House’s Fifty Shades of Grey trilogy — and in the first half of this year soared by 89% to £145-milion in the United Kingdom. Printed books, meanwhile, were only slightly affected, dipping by just 0.4% in value to £982-million.
It means that, taken together, the books market in Britain at least was up by 6% between January and June 2012.

This contrasts sharply with the declines seen in the music business in the UK and globally, which have resulted in the industry gradually shrinking from six music majors in the 1990s to three today. But with Amazon dominating 90% of the e-book market, publishers believe they need sheer size to maintain their position in a business in which technology and commercial relationships are changing fast — already shown by the demise of high-street chain Borders and more than 2 000 bookstores since 2005.

David Roche, the former chief executive of Borders UK, says the merger is justified simply because “it is very important to have healthy publishers because they do the work of selection — editing for readers”.

He believes, also, that if Pearson, Penguin’s British owner, is not fully committed to the business, then “actually, it is better off” as a minority part of an enlarged group controlled by Bertelsmann-owned Random House.

Book publishers are also eager to gain some power over the setting of consumer prices, switching in Europe (but not in the United States) to an “agency model” in digital whereby they — rather than Amazon — choose what to charge in return for handing over a fixed percentage of about 30% to the digital retailer. That compares to the traditional model, whereby publishers charge a trade price, leaving it to the retailers to choose how to charge and ­discount.

The move to agencies selling with one less major player reduces cut-throat competition between hoped-for bestsellers in the run-up to Christmas, for example, and could help to sustain higher prices. At the same time, if publishers feel the need to become their own retailers, the Penguin brand, in Britain at least, is arguably the best known to consumers and could be a place to start.

Agents and authors are already calling “scary” the prospect of a transatlantic publisher housing — as well as EL James — Salman Rushdie, John le Carré, Pippa Middleton and Jamie Oliver.

But Roche also argues that there is “far more change to come” in the books business, reflecting an underlying industry nervousness.

Pearson sources, seeking to justify the deal, also point out emerging competition from self-publishing — once considered a vanity activity. In July, the British group bought Author Solutions, a US-based self-publisher, for $116-million — to gain a foothold in a sector that grew by 60% to reach 211 000 titles in 2011, according to figures from Bowker, the US books market researcher.

Penguin, founded in 1935 to offer the public quality affordable books, recorded profits of £111-million last year. Random House made profits of £161-million, although the larger company was already flattered by the sales of EL James’s sadomasochistic phenomenon.

However, with Universal Music’s takeover of EMI setting a new 30%-plus bar for market share acceptability, the book combination looks unlikely to unsettle regulators. This is a point likely not lost on Thomas Rabe, the Bertelsmann chief executive who is a veteran of the German group’s music industry mergers — the surprise deal that led to the creation of Sony BMG.